The value of information disclosure and lead investor in equity-based crowdfunding

Abstract

Purpose How to free the potential power of the capital market while simultaneously protecting the investors is critical in equity-based crowdfunding. To realize these goals, the purpose of this study was to investigate the value of information disclosure and leader-follower mechanism which have been widely adopted by crowdfunding platforms. Design/methodology/approach Based on the Elaboration Likelihood Model (ELM), a research framework was developed. Then, the authors conducted an in-depth exploratory empirical study of Dajiatou (www.dajiatou.com) which is a typical equity-based crowdfunding service provider in China. Independent-samples t-test and linear regression were used to uncover the value of project information disclosure and the lead investor in terms of fundraising performance improvement. Findings First, the quality of entrepreneurial team information, especially the ratio of full-time staff, staff number and enterprise business age, significantly improve fundraising performance. Second, entrepreneurs’ behaviors, including project updates and project video, play important roles in crowdfunding. Third, whether or not the project has a lead investor, leader’s credibility information and his/her advocacy behaviors – percentage of their investment, identity certification, investment experience and comments for projects – are important factors affecting fundraising performance. Research limitations/implications The authors are one of the firsts to apply ELM to investigate the effects of diverse information on fundraising performance in equity-based crowdfunding. The value of lead investor which has been ignored in prior research was studied through second-hand data. Practical implications First, an equity-based crowdfunding platform should request the entrepreneur to disclose project quality-related information with more details. Second, crowdfunding platforms should set a high qualifications level for lead investor, and limit the lead investor’s committed percentage in a specific project. Originality/value This paper extended the research in crowdfunding by uncovering the value of information disclosure and lead investor based on ELM theory.

Crowdinvesting in entrepreneurial projects: disentangling patterns of investor behavior

“…Nitani and Riding (2017) study data from four European platforms and confirm the relevance of entrepreneurs' education. Using data from the Chinese site Dajiatou, also Li et al (2016) empirically confirm the importance of human capital.…”

“…The success of CF stimulated an increasing body of research devoted to determinants of the individual decision to fund a specific project. This research highlights the significance of quality signals (Ahlers et al 2015;Li et al 2016;Ralcheva and Roosenboom 2016;Nitani and Riding 2017;Piva and Rossi-Lamastra 2018;Bapna 2019), social influence (Herzenstein et al 2011;Zhang and Liu 2012;Lee and Lee 2012;Hekman and Brussee 2013;Vulkan et al 2016;Crosetto and Regner 2018;Hornuf and Schwienbacher 2018;Vismara 2018), and social capital (Mollick 2014;Colombo et al 2015;Giudici et al 2018;Vismara 2016). Using data from Kickstarter, a pre-ordering based CF platform, Lin et al (2014) demonstrate that different types of crowdfunders can have different motives of backing a project leading to different funding strategies.…”

“…Block et al (2018a) show that especially updates about new developments of the start-up have a positive effect on funding. Also, Li et al (2016) report the importance of project updates as a success determinant. Lin et al (2014) identify four distinct groups of crowdfunders on Kickstarter based on their motivations to back specific projects: active backers, trend followers, the altruistic, and the general crowd.…”

“…The importance of entrepreneurs' human capital is further highlighted by prior studies that suggest managerial skills and experience are among the selection criteria that are most frequently used by venture capitalists (Baum and Silverman 2004;Zacharakis and Meyer 2000). Similarly, crowdinvestors perceive the qualifications and education of project creators as a reliable signal of project quality, see Ahlers et al (2015), Li et al (2016), Nitani and Riding 2017, and Piva and Rossi-Lamastra (2018) for related empirical evidence. Therefore, we expect a general tendency of crowdinvestors to fund projects of creators with higher levels of human capital.…”

“…We also control for the size of the founding team. Team size has been shown to positively affect external evaluations of the business idea (Foo et al 2005), the investment decisions of VCs (Kirsch et al 2009) and of crowdinvestors (Ahlers et al 2015;Li et al 2016;Vismara 2018). Therefore, the control variable Team members is a count of the members of the team of project creators.…”